7 financial strategies for business owners who want to live the good life
June 16, 2021
7 minutes to read
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Working for yourself is a wonderful thing. You can take the lead, set your own hours, and handle things the way you want. With hard work, focus, and dedication, self-employment is a phenomenal way to achieve the good life. No wonder 16 million Americans work for themselves!
However, there is also a downside to self-employment. Of all small businesses in the United States, nearly 20% fail after the first year, according to data from the Bureau of Labor Statistics. By the fifth year, almost half had sunk. There are several reasons for this, but a large part of it is financial mismanagement. Without the proper savings strategies in place, many business owners have no reserves to tap into when times get tough. Meanwhile, others invest every last dollar in their business and never take care of themselves. Neither approach is viable in the long term.
In order to build a strong, sustainable business that will keep you and your organization financially resilient now and in the future, you need to implement a rock solid personal and business savings plan. Try to use the following strategies.
Build a working budget
According to recent research, 65% of Americans have no idea how much they spent in the last month. Not following your budget like this is very risky, especially if you are also running a business. To stay on top of your spending habits, you need to create a plan for your business and for yourself. Start by writing down and taking stock of all your current costs, such as payroll, overhead, and insurance. Remember to include the savings. Then, calculate the total, factor in your own salary, and make any necessary adjustments to make sure income is always greater than expenses.
Related: 4 Practical Tips to Build Your Savings and Start Your Small Business
Prioritize your spending
Once you know exactly what you’re spending – and on what – you should prioritize into three distinct categories:
Fixed costs. These are costs that must always be paid, like utilities or your mortgage.
Irregular spending. These are costs that can be reduced, like cable TV and groceries.
Discretionary spending. These are costs that can be reduced if necessary, such as recreation, dining out, and travel.
Prioritizing this way will help you spend your money more wisely, because you’ll know where you can cut back. To help your money go even further, apply this strategy to your personal and professional life.
Separate your accounts
It’s very easy for a self-employed person to mix business and personal expenses, but the two should always be kept separate. Give your business a stand-alone bank account and credit card and use them only for business expenses. You might even consider opening a third account to save money for taxes, so there are no nasty surprises. Everything is clearer and much more efficient when you have separate accounts.
Related: Should You Tap Into Your Personal Savings To Start A Business?
Pay yourself a salary
Your salary provides the constant cash flow needed to maintain financial security in your personal and professional life, so you should always pay yourself first. Set your salary according to your budget and build it in as a monthly or bi-weekly expense. Pay yourself what you deserve, but never be greedy. After all, you also have other bills and commitments to consider.
Give yourself a bonus
If you do really well for a month and the profits pile up, you can pay yourself a bonus. Bonuses can even become a regular feature depending on your income – you could give yourself one every quarter or twice a year, for example. Make sure to use your bonus strategically though. Invest in your retirement, buy stocks, or put them in debt or trade reserves.
Automate retirement savings
If you want to continue living the good life into your golden years, you can’t forget about retirement! When working on your own, it’s essential to set up a retirement account as early as possible. A Traditional or Roth IRA is the most common option, but you can also choose a SEP IRA or a Solo 401 (k) if you have no employees. You can work with a financial advisor or you can do your own research and invest independently. Just make sure your money grows somewhere. A good rule of thumb is to contribute at least 15 percent of every paycheque when you retire. If you need to do it for less than a month, be sure to increase it again when you’re ready.
Finance your reserves
Every business owner needs a rainy day fund to deal with any unforeseen difficulties or challenges that may arise. Try to have at least three months of reserves for yourself and your business. To achieve this, set up automatic savings to contribute consistently and maximize your funds. Keep in mind that the account you create for this purpose should be a safe savings vehicle, not one that could potentially lose value in value. In difficult times, this money will be vital for the survival of your business. With the savings you accumulate, you will be able to pay your staff costs and overhead costs for a set period.
Related: Did You Put Too Much Money in Your Emergency Fund?
Finances are serious business, especially when running a business. Now is the time to make a financial overhaul and put your business on the path to success. Get it right and not only will you outlast your competition, but you will also have the funds to do whatever you want while you live the good life.